Postdicting the Future: Five Things Congress Could Do for Music Creators That Wouldn’t Cost the Taxpayer a Dime Part 4: Fixing Unmatched Songwriter Royalties

[In 2013, I wrote 5 articles on Huffington Post titled “5 Things Congress Could Do That Wouldn’t Cost Taxpayers a Dime”. After the MMA, how did I do on predictions? These posts were written from a 2013 perspective.]

The US is alone in the world in maintaining a compulsory license for songs. The government forces songwriters to license their songs at a rate approved by the government and then has rather flimsy rules about how songwriters actually get paid. These flimsy rules, I suggest, have resulted in unknown amounts of royalties not finding their way to songwriters, particularly under compulsory licenses used by on-demand digital music services.

There’s an easy fix for this — the same rule that was applied against record companies and music publishers for unclaimed royalties in the past: Pay the money to state unclaimed property offices. If songwriters are getting ripped off by brand sponsored piracy on the unlicensed sites, then let’s at least make sure they get paid on the licensed services.

The Compulsory License for Songs

When the Congress established the compulsory license in 1909, the legislative body was concerned that granting exclusive rights in “mechanical royalties” for songs in piano rolls might create a monopoly if a single publisher could buy up the market in songs. However real that concern might have been at the time, the most common complaint from digital music services about songs is that the music publishing market is too fragmented, so it seems that argument is no longer relevant.

One of the big users of compulsory licenses is, of course, Google Play. Concern about the antitrust lusting of songwriters is particularly difficult to comprehend in a world in which the same government allows Google to buy and subsidize YouTube with monopoly rents, buy Double Click to achieve a dominant position in online advertising, and is given a pass by the FTC for antitrust violations. But those songwriters…boy, we have to keep a close eye on them.

Unsupervised Digital Music Services

So what appears to be happening is this: Digital music services use the compulsory license and its labyrinthine regulations — often with notices that are too late, accountings that are noncompliant and data that is just incorrect. To give you a sense of scope, digital music services often offer 20 million or so recordings, all of which contain the co-equal copyright in the song being recorded. Songs and recordings of songs have to be separately licensed for on-demand streaming services (especially the popular “cover recordings”). Songs are frequently co-owned — so the service using the compulsory license must notify a minimum of 20 million songwriters of their use of the song and often two or more writers per song. So let’s just call it tens of millions of licenses.

The digital music services must then track the use of these songs and recordings and match the usage to licenses obtained. There inevitably will be songs for which the writers cannot be found. So even if you assume that these companies can get to the matching stage without making any mistakes at all, what happens when there is usage — and therefore payable royalties — for songs that the service is unable to match — even for the most honest of reasons.

How Digital Music Services Pay Themselves Free Money

Add to this problem another problem — digital music services frequently try to dupe songwriters — the ones they have found — into agreeing that the service need only account to them if the songwriter has over a certain amount in payable royalties — somewhere between $50 and $250 depending on the service. (Google Play, for example, has a $100 minimum threshold — unilaterally imposed — on all international and “friction free” electronic payments.)

To put some math on this, realize that there are about 20 million songs typically available in a broad based retail offering such as Google Play or Spotify. Assume that on average 50 percent achieve $25 in earnings in a given calendar quarter accounting period. (This is consistent with both the “long tail” power law type sales distribution and the miniscule royalties paid to songwriters by these services.)

If a service holds royalty payments from songwriters until payable royalties exceed $25 (such as Google Play’s $100 default threshold as stated in their “Publisher Statement of Account Preference”), this means that the service could then be sitting on up to $250,000,000 in interest-free money. Free money that they theoretically may never have to pay out and only have to pay out when the service determines that the songwriter’s account is payable. Free money that is not permitted under the compulsory license rules for songs.

And that’s one service.

This policy of withholding royalties is fraught with moral hazard and practical problems: The heirs of one songwriter recently tried to sort out these payments and were told they needed to hire a lawyer to deal with the highly litigious digital music service. They couldn’t afford a lawyer so guess what happens to the unclaimed monies? And then there’s the statute of limitations.

Unmatched and Unclaimed Royalties

But there’s another problem with the digital music services — if they service cannot match usage (and earnings) to a royalty recipient in their systems, what happens then? Particularly with monies based on a share of advertising revenue that is distributed proportionately based on usage?

In this example, if in one month all songs were played 100 times and your song was played 10 times, then you would get 10/100 (or 10 percentt) of the advertising pie for that period. But — if there were actually 120 songs played during that period but only 100 could be matched, what happens to the other 20 that were unmatched? There is a growing belief that what happens is that the services don’t count the 20 unmatched songs, and divide the pie up based on the 100 they are able to match.

That means — there are 20 songs that were exploited but that are never paid and are not on the books. Even though there should be no songs on the service that were unlicensed because the compulsory license applies. If this seems high, remember that MediaNet’s lawyers acknowledged in a declaration cited in the current case by Aimee Mann against MediaNet that 23 percent of the millions of songs on the service are unlicensed.

By not counting the unmatched (and probably also unlicensed) songs, a service could argue — albeit fallaciously — that it had no “unallocated” royalties as it allocated all payable royalties to songs it could match and did not accrue any unpaid royalties. If I’m right about this, services are overpaying the matched songs with a share of revenue from the unmatched songs (in our example, 10/120 or 8-1/3 percent instead of the overpayment of 10/100 or 10 percent).

Because the Congress does not allow songwriters to audit the digital music services, there is no real way to know whether this is happening or the degree to which it is happening. If 23 percent of the MediaNet songs are unlicensed, royalties payable on any activity on these songs seems like it should at least be accrued until the songwriters can be found.

Of course — there is a chance that if the digital music services did this voluntarily they might be admitting that they were using unlicensed songs and they want to keep a good eye on those kinds of admissions. So they will come up with many excuses for why they should not be subject to the same laws as everyone else. It is, after all, the Internet, and you know how that can be.

An Easy Fix for Congress: Pay unclaimed money to people who deal with unclaimed money

Even if the Congress does not establish an audit right for songwriters for mechanical royalties as they have for rights holders under the more contemporary webcasting compulsory license and the Audio Home Recording Act, it would be quite simple for the Congress to clarify once and for all that unpaid royalties — whether for the unmet minimum thresholds unilaterally imposed by digital music services, unknown addresses for songwriters, or any other reason — should be paid to the state unclaimed property offices in the state of the songwriter’s last known address or at least the state where the company does business.

Companies that want to take advantage of the compulsory license rules for songs shouldn’t also get to make their own rules to take advantage of songwriters.